Wednesday, January 4, 2012

Almost every international insurance company has looked at opportunities in Asia and by now, most have some sort of presence. By the beginning of 2008, of the top 30, listed, non-Asian insurers in the world, 25 had established some form of life insurance operation in one or more Asian countries. Allstate, Great-West, Power, Loews, and Lincoln National are the only five insurers out of the top 30 not to have any Asian presence.

However, up till now, there are only a handful of MNCs that have established a significant presence across multiple Asian countries. Most of the newer MNC players have only ramped up their presence in the region over the last five years and have achieved no more than small market shares in a very limited number of Asian markets. The operating environment for these MNCs is very different from that found by their more established peers who arrived in Asia 10-20 years earlier. Today, competition is far more intense and the opportunity to be a first mover no longer exists. Newcomers need to arrive in the region with considerable capital and patience because breaking even will take at least 6-8 years when the strategy is to build captive agent distribution. And they need to devote substantial management attention in fact, for many it seems disproportionate attention - to markets that show little immediate prospect of contributing in a meaningful way to profits at the group level.This raises a number of difficult, and possibly unanswerable, questions. How should they think about Asia as a market, given their currently small position and the challenges in establishing a meaningful franchise? Which market should they place their bets on - the mature or the more developing - each with their very different risk-return profiles? How long will it take before the Asian business becomes a meaningful part of the total group value and returns some cash to start contributing significantly to the bottom line of the group? Should they "test the waters" or lay down a substantial investment? How will they set about building relationships in the region and should they attempt to go it alone or seek partners? Are there suitable acquisitions that can be viable shortcuts? How and where to build a regional headquarters to manage the Asian portfolio? Lastly, are the markets in China and India "too difficult to enter" or "too large to ignore?"

Is it too late to enter Asia? Have we already missed the boat? These questions are often asked by those foreign insurers who are not yet in the region or who have only a small presence in the market. The answer depends on the time frame. If one adopts a long-term horizon, the answer clearly is no.There is no doubt that there are still going to be substantial changes in the market dynamics in virtually all of these Asian countries, and the market landscape in 10 years time will look very different from the one that can be seen today. Many Asian markets, in particular China and India, are still at an early stage of their development curve. Penetration is still low and the growth story of the last 5-10 years could easily continue for another couple of decades. With this perspective, entering Asia now is still plausible, despite the market being much more competitive than before.Even in the most mature market in Asia, Japan, there are plenty of examples of new players entering the market at the right time, with the right product, and taking market share despite a highly competitive and dosed market. These examples include AFLAC'S cancer insurance in the 1980s and The Hartford's variable annuities in the early 2000s. These players entered in a specific niche, and had a high level of commitment to their entry efforts. These results are highly encouraging, and demonstrate the point that, even in Japan, there are plenty of success stories.Choosing an appropriate partner is often a critical part of the strategy.The regulations in China and India dictate that foreign companies need to have a local joint venture partner. In other countries this is not a necessity but could be a powerful entry model. The key success factors for joint ventures are the same as elsewhere: there needs to be a good understanding of each partner's intentions; concrete areas of added value or contribution between the partners; and the development of a shared culture within the joint venture. In circumstances where the partnership is created out of regulatory necessity only, it is critical to have an understanding of what happens when regulatory limitations are lifted.Not surprisingly, there are many examples of joint-venture failures. One American insurer's joint-venture foray in South Korea proves a good example. Due to differences and miscommunications between the MNC and the local partner, this joint venture led ultimately to financial problems as well as lawsuits for the parent companies. The company made a US$60 million loss in 2001 and in the same year sold its stake to a domestic competitor. A more recent example can be found in India. In 2005, Australia's AMP exited the Indian market by selling its stake to Reliance Capital, citing a strategic decision to focus on its wealth-management business in Australia and New Zealand. Its local joint-venture partner, Chennai-based " Sanmar Group, sold its stake to Reliance as well.Apart from joint ventures, acquisitions could be part of the entry strategy. Generally, there are not that many available targets in Asia, but there have been success cases. In its early years in Asia, AIG acquired Nanshan in Taiwan while Prudential (UK) bought Chinfon as it entered the same market. More recently MassMutual bought Protective Life in Hong Kong, while Aviva partnered with Woori, a South Korean financial group, to buy LIG Life in South Korea. Manulife, AIG, and AXA all acquired existing firms when entering the Japan market. A few of these acquisitions worked especially well - in most of these cases the MNC buyers actively changed the operating model of the acquired business.

For example, Manulife's premium income grew sixfold within four years after its acquisition by using its variable annuity expertise from the US market and building a strong channel relationship with the Tokyo-Mitsubishi bank. At the same time, as with all acquisitions, there are many more cases where the acquisition failed as culture clashes took time to digest. For example, AXA's premiums declined by 25 percent within the first four years of buying Nippon Dantai in Japan.Going forward, acquisitions are not likely to play a big role in MNC entry into the region, since there are not that many acquisition targets.There are many reasons for this.

First. all the pan-Asian franchises are owned by large MNCs who have voiced no intention of scaling back their Asia operations (with the exception of AIG who will likely sell a part or all of its Asian operations after its bailout from the US government).

Second, many local Asian insurers are family-owned (especially in Taiwan and South Korea), and they often see the insurance company as a family jewel in a larger, diversified group of businesses.

Third, even if acquisition targets are available, they are usually not in the fastestgrowing markets since no one wants to trade away their growth story. Furthermore, prices for these scarce opportunities have been high and are likely to remain so. Therefore, while acquisitions will happen, this will remain an opportunistic strategy for MNCs seeking expansion in Asia. Nonetheless, events such as the 2008 financial crisis may create unique opportunities for aggressive acquirers to buy assets that would not normally be available during normal market conditions.

Asia will continue to be a highly attractive marketplace in the next decade. Notwithstanding the certain volatility that comes with these markets, growth prospects are very strong - in particular, compared to the Western markets in Europe and North America. Forty percent of global premium growth in the next five years will be generated in Asia. Also, margins continue to be very attractive and generally much higher than in more mature international markets. This offers plenty of opportunities for local companies and foreign players alike.

At the same time, the life insurance industry in Asia is at an inflection point. Competition is getting much tougher, many new players have entered the arena, and the recipes for success are changing dramatically. We have outlined what it takes for life insurers to become, or remain, a winner in Asia in the next decade. We are convinced that in 10 years the competitive landscape will look quite different from now. We will see some familiar names in the list of top performers, but also some unknown or new ones. For sure, the prize of winning in Asia will only go to those who have a clear strategy of how to outperform competitors in the region, and the execution ability to implement that plan. For those who are prepared, the next decade in Asia will bring another enormous opportunity for growth and value creation. To learn more, you can check out General Insurance Company In Malaysia.